In line with investor expectations, the Federal Reserve unanimously elected to hold rates steady at its January meeting.
“We’ve entered a new phase for Fed rate policy. Where rate cuts were almost guaranteed at the end of 2024, there is much more uncertainty in 2025,” says Zonda chief economist Ali Wolf. “The Fed wants to take in new information, focusing on inflation and the potential of notable policy changes under the Trump administration.”
The decision by the Federal Reserve Open Market Committee (FOMC) maintains the target range for the federal funds rate between 4.25% and 4.5%. The rate pause follows rate cuts of 50-basis points, 25-basis points, and 25-basis points in September, November, and December 2024, respectively.
“With no news in the [FOMC] statement, every word from upcoming speeches will be closely parsed to determine whether this is just a pause before another cut or two or whether this level of the federal funds rate will be the low point for this cycle,” says Mike Fratantoni, senior vice president and and chief economist of the Mortgage Bankers Association (MBA).
In its statement announcing the decision, the FOMC said recent indicators suggest that economic activity has continued to expand at a “solid pace” with the unemployment rate stabilizing and the labor market remaining solid. The economy added 256,000 nonfarm payroll jobs in December while the unemployment rate was 4.1%. At the time, Wolf suggested the “blockbuster” jobs report likely signaled rate cuts would be delayed in 2025.
While the labor market has remained strong, the FOMC notes inflation has remained “somewhat elevated.” Inflation has made progress toward the Committee's long-run target of 2%, but has not yet dropped to the target range. The Consumer Price Index (CPI) increased 0.4% in December and posted annual growth of 2.9%. The CPI has posted below 3% growth since June 2024.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2% over the longer run,” the FOMC said in its statement announcing the rate pause. “The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.”
Moving forward, Fratantoni says the MBA is forecasting just one additional rate cut for 2025. As a result, the group is projecting mortgage rates will stay with a “narrow range for the foreseeable future.”
“We have a very low probability for the Fed cutting in either March or May,” Wolf adds. “That doesn’t mean there won’t be mortgage interest rate volatility, though. New economic data, changes in investor sentiment, and policy changes can all move mortgage rates one way or another even while the Federal Reserve is on pause.”
